The Federal Reserve is expanding its foray into corporate credit to now buy individual corporate bonds, on top of the exchange-traded funds it already is purchasing, the central bank announced Monday.
As part of a continuing effort to support market functioning and ease credit conditions, the Fed added functions to its Secondary Market Corporate Credit Facility.
The program has the ability to buy up to $750 billion worth of corporate credit. Its March 23 initial announcement is largely considered a watershed moment for the financial markets, reeling from the coronavirus threat spread.
Under the latest guidelines, the Fed said it will buy, on the secondary market, individual bonds that have remaining maturities of five years or less. Those purchases will go along with the ETFs the Fed already has been buying, which are balanced toward investment-grade indexes but also include some junk bond funds that track debt which had been investment grade before the crisis but had been downgraded after.
The intent of the individual debt purchases will be "to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds," the Fed said in a news release.
"This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility's minimum rating, maximum maturity, and other criteria. This indexing approach will complement the facility's current purchases of exchange-traded funds," the statement said.
Issuers must have been rated BBB- or /Baa3, depending on the agency, as of March 22, just before the Fed announced its credit facilities.
The move comes amid falling yields and far better conditions than were in place as the credit market froze up in mid-March as the pandemic caused a lockdown across a large swath of the U.S. economy.
Spreads on lower-grade corporates are back to around 3 percentage points, around where they were at the start of the crisis. Yields on Aaa-rated Moody's debt hit 2.5% at the end of May, near their lowest since just after the end of War World II.
The Fed has yet to launch its Primary Market Corporate Credit Facility. As the name implies, that program will entail purchases in the primary market, or the direct issuers, with the Fed being the sole investor. In addition, the primary facility will target syndicated loans and bonds at issuance.
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June 16, 2020 at 02:04AM
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The Fed says it is going to start buying individual corporate bonds - CNBC
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